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ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Delta Co's current ratio improved from 1.2 to 1.5 during the year, but its inventory days rose from 60 to 95 and its quick ratio fell from 0.8 to 0.7. What is the most appropriate interpretation?

The rise in the current ratio reflects an inventory build-up, not stronger liquidity. Because the quick ratio fell and inventory days lengthened, the company's ability to meet short-term obligations from readily realisable assets has actually weakened.

  1. ALiquidity has improved because the current ratio has risen
  2. BThe improvement is driven by inventory build-up, so underlying short-term liquidity has weakenedCorrect
  3. CInventory days show stronger cash generation from sales
  4. DThe quick ratio is unreliable and should be ignored

Explanation

The current ratio includes inventory, while the quick ratio excludes it. A falling quick ratio with rising inventory days indicates that the increase in current ratio is due to slower-moving inventory, not more liquid assets. Accepting the current ratio alone overlooks this.

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